Public sector reform

29th of June 2012

Public sector contracts have probably never been more hotly contested as swingeing cutbacks take their toll on government and local authority services across the EU. Now the European Commission has announced wide-ranging reforms aimed at making the tendering process easier for all. Hartley Milner reports.

No one can have any doubts about the crucial role the public sector has historically played in sustaining the European cleaning industry, with contractors depending on it for on average about 40 per cent of their turnover. Each year public authorities spend around 18 per cent of the EU’s gross domestic product on goods, services and works and cleaning contracts form a significant part of this. Overall the public procurement market is estimated to be worth 420 billion euros every year.

However in recent years growing frustration has been voiced within the business community about the problematic nature of the tendering process. The EC has responded by taking a long hard look at the need to update the market to make it user-friendlier, and with an eye on boosting jobs and obtaining 'best value' for taxpayers.

In a consultation, most of the 620 stakeholders who took part complained that the laws governing the sector are not only slowing the process but also barring SMEs from accessing contracts.The focus of existing directives on increasing competition had been highly effective, an EC report found, producing savings for the public sector of 21.6 billion euros. But it acknowledged the levels of bureaucracy are holding smaller businesses back.

Problems for bidders

The rigid nature of negotiation procedures and the volume of paperwork involved in tendering are causing bidders significant problems. The average tendering process takes 108 days and costs 30,375 euros, of which 75 per cent comes from the cost of preparing tenders. The worst performing member states take three times longer than the best.

“This reform is necessary, ambitious and realistic,” said Michel Barnier, commissioner for the internal market and services. “The current directives have proven their worth, but directives must move with the times. I would like to make sure that the public procurement directives become simpler and more effective and that they make life easier for those whose daily work involves public procurement.” Key proposals are:

•Greater emphasis on negotiation so contracting authorities can purchase goods and services better tailored to their needs and at the best price

•Increased use of electronic communication as a means of simplifying the public tendering process

•A drastic cut in red tape, including the number of documents required from economic operators (authorised parties involved in the international movement of goods), thereby making their lives easier

•Improved access to public procurement for SMEs through cuts in paperwork and strong incentives to divide tenders into lots and limit the financial capacity requirements for the submission of a tender.

In a move to reduce admin, suppliers will be allowed to self-certify that they meet the requirements to enter a bid. Only winning bidders will be asked to produce proof of this. The EC claims these reforms alone will save 169 million euros a year.

The Commission has decided not to significantly raise the value of thresholds, arguing that to do so would reduce the level of transparency in the process and leave it in breach of open market agreements. Doubling values, as some governments had wanted, could have cost the EU 30 billion euros, it says.

Two other important reforms are:

•Safeguarding the integrity of tendering procedures with measures to counter conflicts of interest, favouritism and corruption

•The appointment by member states of a national authority responsible for monitoring, performing and checking public contracts to ensure the rules are properly applied.

Another aspect of the changes is that public bodies will have to take into consideration life-cycle costs or the “integration of vulnerable and disadvantaged persons” into projects rather than simply choosing the cheapest bid.

And price issues should no longer be the "determining" factor when choosing to award a contract. The default choice should be the most economically advantageous tender, incorporating economic, social and environmental benefits over the entire term of the project.

However, the lowest price should remain the deciding factor "in the case of highly standardised goods or services".

The EFCI view

Price is an issue flagged up by the European Federation of Cleaning Industries (EFCI) in its representations on the proposals to the European Parliament.

Director general Andreas Lill told ECJ: “We are a highly labour intensive industry in which 75-80 per cent of employer costs are labour costs, which is very different to most other sectors. Other industries where the costs of labour are not so high favour the lowest price criterion. But they don’t have the problems that we have – people working part-time, getting not so high wages, etc.

“We are constantly trying to professionalise our sector, enhance trading and encourage employers to better cater for their staff, but if public contracts are only based on price you can almost forget about doing these things. If you only get the contract because you quote the lowest price, you will not have the funds to do all the other things you would like to do. That’s why it is a vicious circle for us and other industries with high labour costs.

“Of course, governments and public authorities argue that they are in a financial crisis and need to save money and cost must come first. They also prefer the lowest price criterion because it is easier to choose and also to defend in case a competitor in the tendering process goes to court and says their offer was better than the winning one.”

But Lill stressed: “Yes, you have first the lowest cost, but then in the longer run you have a higher cost because the quality of the service provided at the site is not good and the people who work there are not happy with it, so the client has problems with his own employees. And there are many examples where the contract has to be re-awarded, which costs time and money. So we always say pay a little bit more and get a better quality service and then everyone is happy.

“The EFCI has stressed over the last 10 years that we want to get rid of the lowest price criterion in favour of public bodies accepting the most economically advantageous offer, which, of course, includes price, but also other criteria. ‘Most economically advantageous’ is defined in the proposals as including technical merit, aesthetic and functional characteristics, accessibility, design for all users and environmental and analysis characteristics.

“So we want this criterion to be the only one in deciding the awarding of a contract, focusing more on quality of service.”

And the EFCI’s case has received an early boost. The Belgium Socialist rapporteur appointed to look into the reforms has asserted in his first working paper that he too wishes to see the lowest cost element eliminated from the tendering process.

“The Socialists are more ready to take into account our arguments than the Conservative group of the European Parliament, which is more for the bigger industries,” Lill continued. “I still don’t believe that the rapporteur will necessarily have a sufficient majority on his committee to skip the lowest cost criterion, but at least he has said this is what he would like to do.”

The move to encourage high value public sector contracts with a value exceeding 500,000 euros to be split into smaller, ‘bite-sized’ lots is aimed at making them more contestable by smaller operators. Contracting authorities would be required to explain why they had opted out of structuring a contract in this way.

Contracts split up

But there are concerns that it may be more difficult to obtain external project finance for a multitude of smaller projects than for larger ones. There may also be efficiency reasons for an authority not to split up a project into smaller packages and in some cases the procurement costs may be higher. With the burden of proof being on the authority, it may opt for a more costly buying strategy for fear of being non-compliant.

Lill agreed this move could be a step too far. “If you have a contract worth 500,000 euros and when you consider that normally a contract runs over two, three or four years, then that figure is not very high,” he said. “If you then go and split the contract into lots and give them to different, smaller companies, then we fear this could lead to fragmentation of the market. Therefore the contract value, above which public authorities have to explain why they did not split the contract into smaller lots, needs to be increased.

“On the other hand, we clearly support the intention of the Commission to favour a market accessible to SMEs. Their intention is to make the tendering process less complicated and with less red tape and we agree with this, along with getting away from price-based competition.”The Commission hopes the proposals will be adopted before the end of this year.